With the Chancellor's upcoming Budget representing a critical test for the government, one area ripe for reform is sitting in the Treasury's own backyard: the UK's public procurement system.
The £400bn Problem in the Treasury's Backyard
The government spends a colossal £400bn every year purchasing goods and services from the private sector. This vast sum constitutes just under one-sixth of the entire national economy. However, this market operates very differently from others, hamstrung by poor policies and flawed design that have left it paralysed. For Chancellor Rachel Reeves to genuinely boost growth and drive savings, a radical overhaul of this home-grown system is essential.
Anyone who has attempted to sell to the public sector can attest to the harrowing experience. The process is notoriously bureaucratic, process-obsessed, and prohibitively costly for many businesses to engage with. From within government, the view is no more appealing. These procurement exercises are often set up for failure from the outset. Deals that would take the private sector days or weeks can drag on for months or even years in the public sector. At the most extreme end, major defence contracts for platforms like tanks and aircraft take an average of six years just to finalise the deal, before a single item is built.
How 'Social Value' Criteria Warps Procurement
This inefficiency is not inevitable. Research into major procurement failures reveals a path forward with a stripped-back, more business-friendly model. A key issue lies with the mandatory 'social value' criteria. These rules, which can award over 10% of assessment marks for factors unrelated to the core project, distort the entire process.
For instance, the government is deciding which company should build highly complex Small Modular Reactors based partly on which firm can create the most jobs for unemployed people, a criteria costing the taxpayer £22m. Similarly, research on the Ministry of Defence's nuclear deterrent is being contracted out based on which supplier demonstrates the most "effective stewardship of the environment." This focus diverts attention from the primary goal: securing the best products at the best price.
This system particularly disadvantages smaller businesses. Larger organisations have dedicated teams to measure carbon emissions and navigate complex tender requirements, while smaller businesses struggle to compete. This is a critical failure, as new companies selling to government are vital for fostering future competition against the large 'prime' contractors who dominate major contracts.
Misguided SME Targets and the Need for Speed
While the government insists on awarding more contracts to SMEs, this approach is misguided. The UK economy has an unusually high number of people working in SMEs compared to peer nations, many of which are economically unproductive. Most are not high-growth start-ups but simply small businesses in small markets.
The real barrier is the sheer slowness of the process. With procurement exercises lasting years, few founders or investors have the cash reserves to wait for a government decision. The solution is to speed up contracting dramatically, including by directly awarding more contracts to smaller companies and foregoing some lengthy competitive tenders. These processes, designed to foster competition, have had the opposite effect, pricing out all but the biggest players. A recent study revealed a staggering 20% of government contracts had only one or zero bidders.
If the government wants a more dynamic, risk-taking economy where new companies can compete, it must start by practising what it preaches. As the single biggest buyer in many sectors, it can break procurement markets open by dismantling the decades of bureaucracy and risk-aversion that have entrenched the largest incumbents.
